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CISCO: NEW GROWTH MODELS
Is Chamber’s India bet going to Pay Out?
Even as Low Cost Competitors begin Gnawing at its heels, Cisco is Already taking its Business to Multiple new Directions. But is it going too far, too fast?
Issue Date - 26/05/2011
 
Over four years ago, Cisco’s Chairman & CEO John Chambers sent Wim Elfrienk, Chief Globalisation Officer and also Executive VP for Cisco Services to Bangalore. Wim had a very specific agenda in terms of taking Cisco’s India relationship much further.

Normally, there are a limited number of oft cited and clichéd ways in which MNCs attempt to do that nowadays, but Wim’s assignment was indeed special. He was to built a second headquarters for Cisco at Bangalore. This centre was supposed to mirror every function of the main corporate office at San Jose including, marketing, HR, R&D, services, finance, et al, and be the platform for its expansion into emerging markets. One particular rationale for choosing Bangalore is interesting. Cisco believes that most of its growth in the future will come from markets in Eastern Europe, far east, South East Asia, India, China and Middle East. And Cisco’s current and potential customers are courteously welcomed to the centre (which is within a 6 hour flight away from all these locations) to witness the newest technology applications that Cisco is bringing in as it strives to leverage its ‘network as a platform’ concept to build solutions with a strong push towards collaboration, data centre virtualisation and video. These are immensely transformative changes for a company that was traditionally just a networking leader, and seeks a new future. To understand the rationale, fine print and likely outcome of these changes, we need to do a brief review of Cisco’s performance.

Miles away in San Jose, Chambers, who took the lead in moving Cisco from being the plumber of the Internet to the platform, has reasons to cheer, as the company is back on the growth path after the recessionary blip. After a fall in revenues by 8.6% yoy to $36.12 billion in the financial year ending July 2009, the company saw a growth of 10.8% yoy in the last fiscal to close with revenues of $40.04 billion. For the quarter ending January 29, 2011, net sales amounted to $10.4 billion, a growth of 6% yoy. On the other hand, there was some disappointment on the margin front, as Cisco reported a fall of 17.9% yoy in non-GAAP income, which was reported at $1.5 billion for the quarter. The consumer business posted a decline of 15% yoy. Besides, it was notable to see a fall of 7% yoy in switch revenue. Although this was said to be related to new product launches taking time to gain traction, backlogs, et al, the company’s performance has been a matter of concern. Post the acquisition of 3Com, HP is giving some trouble to Cisco in this segment when it comes to margins.

 
In fact, this concern is more pronounced in the emerging markets. Entrenched competition like Huawei and ZTE is exerting further pressure on the low margin Asia Pacific market. India is a very stark instance of this. As per Cyber Media Research Ltd. (CMR) data, Cisco’s share in terms of customer revenue in the LAN category of the Indian networking equipment market has fallen from 69% in 2008 to 54% in 2009 before recovering to 62% in 2010. In the WLAN space, share fell from 24% in 2008 to 11% in 2009 before rising to 14% in 2010. Cisco remains a strong leader in enterprise, but it is losing share in SMB, where there are players like HP Networking, Juniper and Dax. Analysts like Subhajit Kumar, Lead Analyst, India Networking Equipment Market, CMR also believe that Cisco’s competitors in networking equipment have established a reputation for strong after sales support, experience lesser channel conflicts and have products not as premium priced as Cisco’s.

Cisco realises that commoditisation is quite inevitable in the market. One key transformation that they have enabled in the past few years is putting consulting at the front end. They have a proper consulting practice that engages with clients at the CIO level as well as at the CEO and CFO level. The typical talk now is on business transformation objectives first and then Cisco talks to them about the technology that can enable those objectives. Cisco personnel (like, for one, Ashok Kumar, Vice President, Cisco Services, Cisco India & SAARC), tell B&E that they follow the PPDIOO model – which means to Prepare, Plan, Design, Implement, Operate & Optimise. This is vendor agnostic consulting and whether or not they take Cisco products after that is a separate issue. Well said, yet, it is meant to be a natural pull for Cisco products in the market. This consulting division has been built with experts from the best companies including the big five consulting firms. There are around 300 such valued resources in Cisco’s workforce of over 67000 employees. Rather than revenue, their major focus is on customer satisfaction. Conversion to contract ratio is currently around 60% and the division contributes some 15-20% of revenue. According to Nareshchandra Singh, Principal Research Analyst, Gartner, “Consulting works for Cisco when networking leads the consulting work.” Otherwise, it is a significant learning curve for Cisco, albeit a step in the right direction.

          

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